Business context and reporting period
The filing is VerifyMe, Inc.’s Form 10-K for the fiscal year ended December 31, 2019; it is not a report solely for 2019 Q4. The request metadata names Openworld, Inc., which does not match the registrant named in the filing and should be verified. VerifyMe develops anti-counterfeiting inks, serialization and track-and-trace products, authentication devices, and digital identity software. Commercialization was still early-stage: revenue remained small, and the company reported minimal or no revenue from several key products.
Financial results and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $244,748 | $74,884 |
| Gross profit / margin | $199,689 / 81.6% | $46,082 / 61.5% |
| Operating loss | $(2,432,573) | $(2,595,801) |
| Net loss | $(2,507,799) | $(2,932,462) |
| Net loss per share | $(0.02) | $(0.03) |
| Cash used in operating activities | $(1,579,412) | $(2,376,714) |
Revenue increased 227%, principally from security printing and authentication serialization for two global brand owners. Gross margin improved, which management attributed to more efficient use of RainbowSecure ink. Operating expenses were $2.63 million, approximately level with 2018: lower R&D, legal and administrative costs were offset in part by higher sales and marketing and payroll costs. The smaller net loss primarily reflects the absence of the $779,000 shareholder settlement expense recorded in 2018.
Cash and cash equivalents were $252,766 at year-end 2019, down from $1,673,201. Current assets were $447,332 versus current liabilities of $1,010,834, a working-capital deficit of approximately $563,502. Total assets were $943,154 and stockholders’ deficit was $67,680. At December 31, 2019, convertible debt had $600,000 principal and a $297,997 net carrying value; a related derivative liability was $171,499.
Material changes and financing
- Cash used in operations declined year over year, partly because 2018 included a $500,000 cash settlement payment. Investing cash outflow increased to $302,330, including equipment for lease, patents and software. Financing provided $461,307 in 2019, versus $3,465,650 in 2018, when the company raised equity and warrant-exercise proceeds.
- After year-end, on March 6, 2020, the company completed a $1,992,000 gross senior secured convertible-debenture financing, receiving $1,814,040 net. It used approximately $750,000 to redeem the prior debentures, including a $150,000 early-redemption fee. The new debentures carry 10% annual interest payable in shares, mature 18 months after issuance, and are secured by a first lien on company assets, including intellectual property.
- The new financing included 24.9 million warrants and potential conversion at $0.08 per share, subject to the stated terms. The filing estimates that conversion and warrant exercise could result in substantial share issuance and dilution; actual dilution depends on conversion, exercise and applicable adjustments.
Outlook, risks and unusual items
No quantified revenue, earnings or cash-flow guidance is provided. Management’s plans depend on increasing sales and raising additional capital. The company said it did not have sufficient cash for its working-capital needs over the next 12 months and expected to need additional financing around December 1, 2020 absent a material increase in operating cash generation. The auditor’s report highlights substantial doubt about the company’s ability to continue as a going concern.
- Commercial execution remains uncertain: the company reported limited revenue, no sales to date for its multi-factor authentication product, and no revenue yet from tested pre-printed VeriPAS labels. INX inkjet testing was ongoing. Reliance on HP Indigo qualification and distribution partners may constrain market access.
- Revenue and receivables were highly concentrated: two customers represented 97% of 2019 sales and 97% of year-end accounts receivable. One vendor supplied all pigment and one vendor supplied all canisters in both 2019 and 2018.
- Management concluded internal control over financial reporting and disclosure controls were ineffective at year-end because of a material weakness in segregation of duties associated with limited staffing. The weakness had not been remediated.
- Other disclosed risks include competition from substantially larger companies, the need for further financing, possible dilution, dependence on a small team, intellectual-property and cybersecurity risks, and privacy regulation. The company reported no material pending or threatened legal proceedings known to it.
- In 2018, the company recorded a $779,000 expense related to terminating a revenue-sharing arrangement, partly offset by gains from debt and payable forgiveness. These items affect comparison with 2019.
Most important facts for investors to verify
- Confirm the issuer identity: the request says Openworld, Inc., while the filing identifies VerifyMe, Inc. (OTCQB: VRME).
- Review the March 2020 debenture and warrant terms, collateral, repayment timetable, conversion mechanics, and potential dilution; verify remaining proceeds and subsequent financing needs.
- Assess whether operating cash runway, the approximately $150,000 deferred CEO salary due August 15, 2020, and the going-concern uncertainty were addressed through subsequent funding or sales.
- Track customer concentration, actual recurring sales and collections, and progress in qualifying additional HP Indigo presses and completing INX inkjet development.
- Check whether management remediated the disclosed material weakness in internal controls and whether customer and supplier concentrations have changed.